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Rate Hike Odds, Overseas Data

Rate hike odds for the March meeting are sitting at exactly 50% after yesterday’s rather sharp move from Friday’s 40%. We were at 44% intraday and then voting member Robert Kaplan said “sooner rather than later means in the near future” in response to a question on the next rate increase. There is only 4 days left in the Fed’s quiet period and this should be what the Fed wants because now they have a green light to go if they choose. Yellen and Fischer speak on Friday and they can further the odds with a wink and a nod. Tomorrow we see their favorite inflation measure, the PCE, and the headline figure is expected to print 2% for the first time since April 2012. The next payroll number comes after they enter the quiet period but if the Fed is going to base the next rate hike on what that number will be I think would be pathetic as it will be revised multiple times in the coming year. It would be the epitome of indecision if Yellen, Fischer and Dudley don’t know right now what they are going to do in two weeks, especially in the midst of the longest DJIA winning streak in 30 years.

I’ll repeat what former Chairman of the Federal Reserve William McChesney Martin said back on October 19th 1955, “If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff…The Federal Reserve is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” We’ve had two different parties though. The asset price one (the 3rd Fed mandate) has been raging now for 8 years of course, the 2nd longest ever, and feeds directly into the financial stability discussion. The economic one we know has been more muted but is definitely impacted by the behavior and the eventual aftermath of that asset price bash and when the party ends. Whenever that might be.

Japanese industrial production in January fell .8% m/o/m which was a miss relative the estimate of a gain of .4%. The y/o/y gain was still a pretty good 3.2% but still points to the lumpy nature of Japanese business activity. The production drop was led by a fall in autos and other transport equipment, machinery, chemicals and tech. This figure follows last week’s export miss. On the domestic front, retail sales grew .5% m/o/m which was a touch ahead of the estimate of up .3%. Kuroda spoke today in Parliament and repeated his obsession for 2% inflation is still intact. With consumer spending and wage growth still punk, it remains beyond me why.

The other thing of note out of Japan and the BoJ happened after their markets closed. The BoJ laid out for the first time which dates and what maturity range they plan on buying in JGB’s in March. I guess this is their attempt to get back some ‘yield curve control’ after the market tested them in February. They already own 40% of the Japanese JGB market but I expect more market tests. The yen has been steadily rising all morning and maybe that’s because the BoJ may buy less bonds in March relative to February.

Ahead of the February CPI report out of the eurozone on Thursday we saw today French inflation which underwhelmed expectations while Italy’s rose above the forecast. The market response, as measured by the euro inflation swap, was unchanged at 1.71%. The euro is back above $1.06 with general dollar weakness.

On that weakness and quietly, the JPMorgan Asian currency index is at the highest level vs the US dollar since November 9th, the day after the election.